Ex-Bundesbank head Weber warns of asset bubbles

Former president of Germany’s Bundesbank, Axel Weber, says any intervention by the Reserve Bank of Australia in foreign exchange markets to bring down the value of the Australian dollar is dangerous.
Photo: Tamara Voninski

Central banks printing money across the globe are distorting prices and could create asset bubbles in property and currency markets, according to the former president of Germany’s Bundesbank, Axel Weber.

The veteran banker warned that historically low interest rates in the US, Europe and Japan had also put upward pressure on exchange rates in countries like Australia.

“When you have major interest rate differ­entials, that is one of the arguments that usually causes currency movements and financial movements and puts pressure on exchange rates," Mr Weber said on a visit to Sydney in his new role as chairman of Swiss bank UBS.

“In order to avoid those pressures on exchange rates in the major developed economies, interest rates in those regions are all heading south."

Mr Weber said any intervention in foreign exchange markets to artificially bring down the value of a currency would be internationally scrutinised and viewed sceptically. It might also be dangerous due to the prospect of stoking inflation.

“One of the reasons why many people move into real estate is that funding of housing projects and real estate purchases have become more affordable in a zero interest rate environment," he said.

“The risk is as international rates are normalised at some point . . . that would lead to much less affordability and sustainability for those houses bought under the assumption that low interest rates are there for a long period of time."

Related Quotes

Company Profile

But the US Federal Reserve’s latest quantitative easing program, or QE3, was given Mr Weber’s seal of approval.

“I think the action the US central bank has taken with QE3 is more aligned with the underlying weakness in housing markets than Operation Twist or QE2 was," he said.

“It will help house prices bottom out and that is something that has the potential for very targeted support for labour and for housing to strengthen."

Mr Weber held the presidency of the German central bank from 2004 to 2011, and gained a reputation for holding a tough anti-inflationary line. Billed as the next president of the European Central Bank after Frenchman Jean-Claude Trichet, Mr Weber controversially pulled himself out of the race, citing his opposition to bond-buying programs designed to ease funding costs of stricken peripheral euro zone countries.

He is highly regarded in Australia and cites a personal friendship with RBA governor Glenn Stevens. After meeting Mr Weber this week ANZ Banking Group chief executive Mike Smith called him a “class act" and “one of the most impressive central bankers you will meet".

Mr Weber’s unexpected withdrawal from the ECB race reportedly triggered a political crisis for German Chancellor
Angela Merkel
, who had worked to position Mr Weber as the top choice for the position Italian Mario Draghi now holds.

At the time of his withdrawal Mr Weber was mooted as the successor to Deutsche Bank chief executive Josef Ackermann, but the 54-year old delivered a coup to Swiss bank UBS by announcing in July 2011 he would take its chairmanship.

Mr Weber’s opposition to the European Central Bank’s bond-buying program has been echoed by his successor at the Bundesbank, Jens Weidmann. Mr Weidmann recently likened central bank easing programs to the storyline of Faust, when the devil convinces a Roman emperor to print money, spurring strong economic growth, before rampant inflation destroys its real value. Mr Weidmann was also the only member of the ECB to vote against its new plans to buy unlimited amounts of bonds of countries in receipt of bailouts to hold down yields.

It is a view Mr Weber still holds.

“The action to buy sovereign debt and alleviate funding constraints of European peripheral governments is not the right action to take. It’s an indirect way to support the European economy by buying the debt of peripheral economies from people who are reluctant to hold these instruments," Mr Weber said.

Despite Chancellor Merkel’s contrary stance on some key issues, Mr Weber said the euro would survive and had Germany’s full support.

“The euro will survive, not a single doubt about that. The euro is a historic project and history only evolves in one direction, that is forward. You cannot unwind history," Mr Weber said.

“Since a lot of the future funding of the euro depends on Germany’s attitude to the euro, Germany is absolutely committed in political circles to the euro. That historical project which has now come into difficult waters will pull through.

“It will be difficult, it will be met with conflicts, but ultimately this project will not fail."

His comments come after fresh signs of discord between Germany and France over plans for the EU’s rescue fund to lend directly to banks.

On Monday night Australian time International Monetary Fund managing director
Christine Lagarde
called for the urgent revival of a euro zone banking union, a concept that has been put on ice thanks to Franco-German disputes on the issue.